Here’s the entire text of the prepared remarks from AsiaInfo Holdings’ (ticker: ASIA) Q3 2005 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.
Eileen Chu, Investor Relations
Steve Zhang, President and CEO
Ying Han, EVP and CFO
Chang Qiu, Forun Technology Research, Analyst
Welcome to the AsiaInfo Third Quarter 2005 Results Announcement. As a reminder, this call is being recorded.
I will now turn the conference over to Ms. Eileen Chu, Director of Investor Relations. Please go ahead, Ms. Chu.
[Eileen Chu, Investor Relations]
Hello everyone and welcome to AsiaInfo's 2005 third quarter conference call. Today Steve Zhang, President and CEO of AsiaInfo, will review some of our Company's business highlights for the most recent quarter and Ying Han, our Chief Financial Officer, will provide greater details on our financial results and provide guidance for the upcoming quarter. Mr. Zhang will then provide a few closing remarks and open the call to questions.
Before we continue, allow me to review our Safe Harbor Statement. During this conference call representatives of the Company may make forward-looking statements in an effort to assist you in understanding the Company and its results. Please refer to AsiaInfo's report filed with the SEC for discussion of important factors that could affect future results. Also, please take note that all figures mentioned during this conference call are in U.S. dollars.
I will now turn the call over to AsiaInfo's President and CEO, Steve Zhang.
[Steve Zhang, President and CEO]
Hello everyone and thank you for joining us. I am pleased to report that AsiaInfo's net revenues and earnings per share for the third quarter were in line with our previously stated guidance. During the quarter we continued to execute our strategy of focusing on our high growth, high margin telecom software and the security products in the services business. We have made important progress in these core businesses with 14% year-over-year growth in our Telecom solution and 50% year-over-year growth in the security business and we have every reason to believe that with our leading offerings and the brand recognition AsiaInfo will continue to outperform in this area.
Turning to our core telecom business, we saw strong performance over the quarter in terms of both revenue generation and orders booked. We signed several key contracts with China Mobile, including a significant contract with Guangxi Mobile to upgrade and optimize their BOSS system, which is the largest BOSS system in China, including enhancing its data support and backup ability.
We also signed a contract with Shanghai Mobile to construct a disaster recovery backup system in support of their existing BOSS system. This will ensure that the carrier can protect its core data, maintain operation continuity and provide value added services to its customers without interruption. As a long-term strategic partner of Shanghai Mobile AsiaInfo is the largest system integrator and telecom solution provider for the carriers BOSS network. This contract list further demonstrates the benefits that AsiaInfo's operation support system technology brings to telecom carriers and the enterprises and it further enhances our position as one of China's leading telecom software product and IT service providers.
Looking to the future, the sales capital for Telecom Software Solutions is mainly the dealing and the Customer Care Solutions is encouraging. We are especially excited by the increasing demand from our current telecom customers to implement additional services and the new functions to their existing BOSS systems as a means of maximizing their efficiency and improving customer services. We also saw significant progress in our security product in the services sector, including a contract with Beijing Mobile to carry out a network security and the vulnerability assessment.
As I mentioned earlier, AsiaInfo's strategic focus is squarely on growing our high margin core telecom software and services and IT security business. These lines are highly profitable in drawing leading market share and strong competitive advantages and we believe that with our-- and we believe that there are cross marketing opportunities for selling security solutions into our telecom customer base. In line with this strategic focus, we have recently announced the sale of our Human Resources and Business Intelligence software business to Hinge Software for RMB 15 million. That's approximately in U.S., 1.85 U.S. million.
Our earnings release contains further details on this transaction. We are confident that this sale will further our strategy by allowing AsiaInfo to focus on expanding market share in our core business. Of course, we will keep you up to date on our progress as we continue to execute against this strategy. Let me now turn the call over to Ying Han, who will review this quarter's financial highlights.
[Ying Han, EVP and CFO]
Thank you, Steve. Good morning. Rather than repeating all of the numbers in our Press Release I will provide some explanation of key results for the quarter. I will also discuss guidance for the quarter as well as for the 2005 fiscal year. Total revenues net of third party hardware costs for the quarter were in line with guidance at $22 million, an increase of 53% year-over-year and a 7% decrease sequentially. In this quarter, both our software products and solutions and our service revenues showed substantially year-over-year growth, but decreased sequentially due to lower revenue generated during the quarter by our recent diversified business assets.
In all, AsiaInfo contributed 26% to total net revenue during the quarter, slightly below previously provided guidance due to the ongoing restructuring. As Steve had mentioned, along with our core telecom gains, in all AsiaInfo's core accretive gain has been experiencing highly healthy growth, which should translate into a strong 2006 for Lenovo-AsiaInfo.
In line with our strategy of increasing higher margin software and service revenues gross margins rose for the fourth consecutive quarter reaching 43%, compared to 42% for the year ago and 41% last quarter. We are very pleased with our continued success in increasing profitability and we expect this trend to continue as we focus on growing our high margin businesses.
Total operating expenses for the quarter showed a sequential increase as sales and marketing expenses increased by 15%, reflecting increased sales and marketing efforts in the security products and service business. G&A expenses decreased 18% from last quarter as a result of a decrease in the provision for bad debts due to increased collection of bad debts during the quarter.
During the third quarter Lenovo-AsiaInfo recorded an operating loss of $2.1 million before overhead allocation and after the amortization of intangible assets. The loss is largely due to the revenue decrease from the business restructuring exercise carried out during this quarter.
Moving to our balance sheet, net operating cash flow for the quarter was $6.3 million due to increased collection of accounts receivable. Two long outstanding debts, which have been fully provided for in accordance with Company guidance, were collected in the third quarter. Our total cash position, including cash and cash equivalents, restricted cash and short-term investments increased from $142 million to $148 million, primarily as a result of the increase in operating cash flow over the quarter.
Enhanced collections over the period resulted in a 12% decrease from last quarter in accounts receivable and DSOs for the third quarter decreased by 2 days from last quarter to 103 days. And the current liabilities decreased to $17 million due to $27 million paid to Lenovo as the final installment of our acquisition consideration.
Assets and liabilities related to human resources and business intelligence assets has been sold in the fourth quarter, has been reclassified separately in this quarter.
High restart was down U.S. dollar $22 million in this quarter as we completed the issuance of shares to Lenovo causing shareholder aggregate to increase by the same amount.
Accumulated other comprehensive income increased by $2.4 million from last quarter largely reflecting the recent revaluation of the R&D.
I will now read you AsiaInfo's financial guidance for the fourth quarter of 2005. Please note that the following outlook statements are based on our current expectations. These statements are forward-looking and the actual results may differ materially.
AsiaInfo expects fourth quarter net revenue to be U.S. dollar $18 million to $20 million, equivalent to a year-over-year decrease of 13% to 22% and a quarterly decrease of 9% to 18%. Excluding one-time impairment charges and associated diversified costs relating to the disposal of non-core businesses of U.S. dollars, $18 million to $23 million, earnings per basic share for the quarter is expected to be $0.00 to $0.01. On a GAAP basis loss per basic share for the quarter is expected to be U.S. dollar, $0.38 to $0.49.
For the 2005 fiscal year we expect net revenue to be U.S. dollars $86 million to $88 million. Earnings per basic share is expected to be U.S. Dollar $0.06 to $0.07, excluding the above mentioned one-time impairment charges and the associated diversified costs. On the U.S. GAAP basis, loss per basic share is expected to be $0.33 to $0.46.
Now, let me turn the call back to Steve for his closing remarks.
[Steve Zhang, President and CEO]
Thank you, Ying. Going into the last quarter of the year I'm confident that AsiaInfo has regained its strategic focus and is poised for healthy growth in year 2006. In the telecom software and services space while we continue to expand our traditional billing and customer care solutions, that's the area to where we enjoyed clear competitive advantages and leading market share. We'll also be rolling out exciting new initiatives that leverage our core competencies.
In the months ahead we'll be keeping you updated on these new initiatives, as well as the progress we are making here in our current key markets.
On that note, I would now like to open the call to any questions you may have.
- The Q&A from this call is here.
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